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It is a basic rule of human nature not to voluntarily self inflict pain upon ourselves. If there is any
way to avoid the day of reckoning, even if it means the eventual catastrophe
will be much worse if we delay, we always choose to hold reality in abeyance.
This principle applies to countries as well because the notion of embracing
austerity on a national level goes against the grain of our collective
psyche.

But the
United States faces a date with austerity regardless of whether it is
voluntary or forced upon us. Our Q3 GDP report clearly illustrated that
although growth is anemic (just 2%), inflation is creeping much higher.
Despite the fact that we are in a revenue, earnings and capital goods
recession; the rate of inflation doubled from 1.5% during Q2, to 3% in the
current quarter. However, now the U.S. faces the Fiscal Cliff come January
and that would throw the already fragile economy into a deep recession. The
question is will our government voluntarily push the economy over the edge.

The truth is
that the developed world faces a decision that is unbearably sharp and
impossible to avoid. Either to drastically cut spending now in the hope of
getting their debt to GDP ratios under control; or continue to borrow and
spend until the market causes a full-blown currency and bond market crisis.
The problem is that accepting austerity at this juncture would push already
recessionary economies much deeper into the abyss. That's because it will
take some time before the private sector can absorb those individuals that
formerly were employed by the government or relied on transfer payments for
their consumption. And tax hikes steal money from the job creators and hand
it over to government to be misallocated.

As the U.S.
approaches the Fiscal Cliff, markets have already begun to price in its
effects. The drop in government spending and increased tax revenue of around
$600 billion in 2013 would cause most asset prices to fall. The reduction in
government spending would also lead to a fall in money supply growth.

But austerity
is something that individuals and governments have a long history of avoiding
at all costs. It is my belief that the U.S. will back away from the cliff and
decide to adopt a stopgap measure that extends the current tax rates and
eliminates most spending cuts. The plan would then be to reach a grand
bargain down the road where republicans and democrats agree on a combination
of increased revenue and entitlement reform that cuts $4-6 trillion of
additional debt over the next decade. However, if our government cannot agree
on massive fiscal reform while there is the Fiscal Cliff hanging over its
head, why will they agree down the road when no such sequestration exists?

Washington
appears to be offering us two choices; trillion dollar deficits every year
until we have a currency and bond market crisis or to go over the Fiscal Cliff
in January. If D.C. cannot agree now to accept austerity, even after we have
run up $16.2 trillion in debt, why should anyone believe they will reach an
agreement in the future? Another problem is that even if we do actually cut
around $5 trillion in projected deficits over the next decade, we will still
be adding another $5 trillion in debt over the next ten years. That's because
these proposed cuts aren't really cuts in existing debt but merely a
reduction in the growth rate of new debt.

The truth is
that austerity is unavoidable in the debt-laden developed world. Austerity is
by its very nature both depressionary and
deflationary. That is why it is never chosen voluntarily. It is simply much
easier to continue to borrow and spend until your creditors finally cut you
off. I fear that is the path of least resistance and we will see rapid growth
in the money supply, a fall in the dollar and risk asset prices soar once the
U.S. decides to reject the opportunity to voluntarily confront its debt
addictions at this time.

Mr. Michael Pento is the President of Pento Portfolio Strategies and serves as Senior Market Analyst for Baltimore-based research firm Agora Financial.
Pento Portfolio Strategies provides strategic advice and research for institutional clients. Agora Financial publishes award-winning newsletters, critically acclaimed feature documentaries and international best-selling books.
Mr. Pento is a well-established specialist in the Austrian School of economics and a regular guest on CNBC, Bloomberg, FOX Business News and other national media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
Prior to starting Pento Portfolio Strategies and joining Agora Financial, Mr. Pento served as a senior economist and vice president of the managed products division of another financial firm. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors.
Additionally, Mr. Pento has worked for an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street. Earlier in his career Mr. Pento spent two years on the floor of the New York Stock Exchange. He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Mr. Pento graduated from Rowan University in 1991.